ETMarkets Smart Talk | Defence, power, EMS, AI proxies: Why FOMO is driving parts of the mid- and smallcap rally, says V Srivatsa
Market analyst V Srivatsa warns that the current rally in India's mid- and smallcap stocks is increasingly driven by FOMO rather than fundamental value. He suggests that the valuation gap between these sectors and large caps is unsustainable, signaling a potential market reversal.
Why it matters
Investors risk significant losses if they ignore valuation fundamentals in favor of speculative momentum in high-growth sectors like defense and AI.
India’s mid- and smallcap rally continues to attract investors, with several thematic pockets—from defence and power equipment to electronic manufacturing services (EMS), aerospace and AI-linked plays—commanding strong market interest.But as these stocks scale fresh highs, concerns are growing that momentum and fear of missing out (FOMO) may be running ahead of fundamentals.The valuation gap is becoming difficult to ignore. While the Nifty 50 is trading at around 21 times earnings, the Nifty Midcap and Smallcap indices are valued at roughly 33x and 32x earnings respectively—a premium of nearly 50-57% over large caps. Several companies in these high-growth themes are now priced for near-perfect execution, leaving little room for disappointment.In an interaction with Kshitij Anand of ETMarkets, V Srivatsa, Executive Vice President – Equity, UTI AMC, explains why investors need to look beyond the latest hot theme and distinguish genuine earnings potential from FOMO-driven momentum.
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